Puerto Rico's representative seeks to relax Jones Act for bulk ships

Thursday, March 21, 2013

The Government Accountability Office Wednesday released a report on shipping between Puerto Rico and the United States and possible modification of the Jones Act requirement that vessels participating in the trade be registered in the United States, crewed by U.S. citizens, and built in a U.S. shipyard.
The report was prepared at the request of Pedro Pierluisi, Puerto Rico’s resident commissioner in the U.S. House.
GAO said “Shippers doing business in Puerto Rico that GAO contacted reported that the freight rates are often—although not always—lower for foreign carriers going to and from Puerto Rico and foreign locations than the rates shippers pay to ship similar cargo to and from the United States, despite longer distances.”
However, the congressional watchdog agency added “data were not available to allow us to validate the examples given or verify the extent to which this difference occurred. According to these shippers, lower rates, as well as the limited availability of qualified vessels in some cases, can lead companies to source products from foreign countries rather than the United States.”
The report said “According to industry stakeholders we interviewed, foreign-built barges can be priced about 20 percent less than U.S.-built barges, and foreign-built containerships can be priced 50 percent less than similar U.S.-built containerships.”
But Matt Paxton, president of the Shipbuilders Council of America, said the report then “spends the next several pages caveating that” statement. He noted some of the lower cost of building ships abroad is attributable to a glut of shipbuilding capacity overseas, lower wages and environmental standards and also because foreign yards have the opportunity to build ships in long series instead of one or two at a time.
GAO noted that average freight rates of the four major Jones Act container liner carriers in this market (Horizon, Sea Star, Crowley and Trailer Bridge) “were lower in 2010 than they were in 2006, which was the onset of the recent recession in Puerto Rico that has contributed to decreases in demand.”
The report added "Nonetheless, some companies operating in Puerto Rico told us that they may not purchase goods from U.S. sources because of higher transportation costs on Jones Act vessels compared to foreign-flag vessels. In some instances, they may instead purchase the same or a closely substitutable good from a foreign country. This was particularly evident in the bulk shipping market."
It added that "According to shippers we interviewed, these vessels are often under term charters and a limited number of qualified Jones Act vessels may be available at any given time to meet shippers’ needs.”
Pierluisi said “the report identifies several areas where Jones Act-qualified bulk cargo vessels are not available to meet the legitimate economic needs of individuals and businesses in Puerto Rico, namely with respect to the maritime transportation of energy supplies, agricultural inputs and commodities, and other products from the U.S. mainland.”
As a result, he “intends to introduce legislation to relax the Jones Act to enable the shipment of natural gas and other fuel products from the U.S. mainland to Puerto Rico, thereby reducing the cost of electricity, improving air quality, and making Puerto Rico a more attractive place to raise a family and conduct business.”
In addition, Pierluisi said he will “introduce legislation to relax the Jones Act to provide economic relief for Puerto Rico’s farmers and ranchers, enhancing their ability to purchase agricultural inputs and commodities that are not available in Puerto Rico from the U.S. mainland rather than effectively limiting them to importing those products from foreign countries,” and "believes these bills will be mutually beneficial to the economy of Puerto Rico, which is a U.S. jurisdiction, and the national U.S. economy.
“Although plans have been made to convert more of Puerto Rico’s power plants from oil to natural gas, this effort cannot be fully realized unless Puerto Rico can gain access to natural gas produced in the U.S. mainland. Because of its geographic location, of course, Puerto Rico can only obtain this gas via ship, not pipeline. However, the GAO noted in its report that there is an extremely limited pool of Jones Act vessels that could be used to transport natural gas from ports in the U.S. mainland to Puerto Rico,” Pierluisi said.
“Therefore, the bill I will introduce will enable foreign vessels to transport liquefied natural gas and other fuels from the U.S. mainland to Puerto Rico. This will benefit energy producers in the states, who will gain access to an important new U.S. market and make a positive contribution to their local economies. It will also provide a direct benefit to consumers in Puerto Rico, who will see their electricity bills decrease,” he added.
"In the case of containerized cargo, as distinct from bulk cargo, the GAO report reveals a more complex situation. On the one hand, the GAO concludes that the Jones Act 'may result in higher freight rates—particularly for certain goods—than would be the case if service by foreign carriers were allowed,'" he explained.
He said he "has not ruled out the introduction of additional legislation on this matter following further study of the report and consultation with stakeholders."
GAO said the effect of modifying the application of the Jones Act for Puerto Rico is highly uncertain, and various trade-offs could materialize depending on how the Act is modified.
"Under a full exemption from the Act, the rules and requirements that would apply to all carriers would need to be determined. While proponents of this change expect increased competition and greater availability of vessels to suit shippers’ needs, it is also possible that the reliability and other beneficial aspects of the current service could be affected. Furthermore, because of cost advantages, unrestricted competition from foreign-flag vessels could result in the disappearance of most U.S.-flag vessels in this trade, having a negative impact on the U.S. merchant marine and the shipyard industrial base that the Act was meant to protect,” GAO said.
GAO noted instead of a full exemption, some stakeholders advocate an exemption from the U.S.-build requirement for vessels. According to proponents of this change, the availability of lower-cost, foreign-built vessels could encourage existing carriers to recapitalize their aging fleets.
But it noted Sea Star has recently ordered two new U.S.-built vessels for this trade. Horizon Lines also recently refurbished its ships in the Puerto Rico trade, drydocking them for work in China.
Speaking at the Jacksonville Port Authority’s 2013 Logistics & Intermodal Conference on Tuesday, John P. Hourihan Jr., senior vice president and general manager for Puerto Rico and Caribbean at Crowley Maritime Corp., said “the system change we are looking to do is to convert from that tug-and-barge operation to Lo/Lo (lift-on/lift-off) vessels similar to what Peter (Keller, president of Sea Star) outlined Sea Star is doing - LNG fuel Lo/Lo vessels. So for us, that is a significant change from having triple-deck ramps in our port locations… So the round numbers for us is a half-billion dollar conversion project.”
Mark Miller, a spokesman for Crowley, said later that the company has “been looking at a number of new-build alternatives over the past few years. While John laid out one possible option, we aren't ready to say what our re-fleeting will look like until more details are finalized.”
Tim Colton, a well-known commentator of shipbuilding said in his blogMaritime Matters that “Crowley has been meeting this week with one of the potential shipbuildiners to discuss LNG-powered ro/ro ships."
The American Maritime Partnership, a group that represents the domestic shipping industry, said the GAO report “confirmed that previous estimates of the so-called ‘cost’ of the Jones Act are not verifiable and cannot be proven.”
Most satisfying, AMP said, was the finding that the American domestic fleet had provided reliable service in Puerto Rico.
The report said “According to U.S. and Puerto Rico shippers we interviewed, the four carriers generally provide reliable, on-time service between the United States and Puerto Rico, allowing shippers to meet ‘just in time’ delivery needs. In fact, many island importers’ inventory management relies on
prompt and regular shipping and receipt of needed goods to stock shelves, instead of warehousing goods, a benefit that helps minimize inventory storage costs.”
GAO said “we were told by stakeholders that warehousing is costly in Puerto Rico because of high energy costs and because the Puerto Rico government imposes inventory storage taxes on certain goods both imported into and manufactured in Puerto Rico.”
AMP reserved its main criticisms for the GAO’s analysis of LNG and other bulk cargos in Puerto Rico.
“In contrast to its analysis of the container shipping market, GAO’s review of the LNG and other bulk shipping markets is anecdotal, incomplete, misleading, and one-sided,” AMP said. “In fact, there are already fully compliant American vessels available to transport LNG to Puerto Rico and, of course, others can be built in plenty of time. In addition there are special provisions of law that allow Puerto Rico to move LNG into the Commonwealth on foreign vessels from the U.S., and of course, LNG can be imported into Puerto Rico from overseas any time. If there is sufficient demand for LNG or other bulk cargoes, the American maritime industry will meet that demand,” it said.
A change in the “build America” requirement for Jones Act ships could encourage new carriers to enter the market, GAO said, but it also noted that as with a full exemption, an exemption from the requirement that ships be built in U.S. shipyards “could also reduce or eliminate existing and future shipbuilding orders for vessels to be used in the Puerto Rico trade, having a negative impact on the shipyard industrial base” in the United States that the Jones Act was meant to support. - Chris Dupin